If you're looking to buy a house, but don't have a chunk of change lying around for a down payment, an 80/20 mortgage mayl solve your problem. Also called a "piggyback" mortgage, an 80/20 mortgage lets you finance 80 percent of the purchase price with the main loan. You can get a second mortgage with the remaining 20 percent. The smaller mortgage piggybacks on the main mortgage for the full purchase price, and doesn't require a cash down payment.
The benefits are obvious: assuming you qualify for both mortgages, you can get into a house with little or no cash outlay. You'll need just enough money to cover closing costs, which can't be financed. But you will avoid private mortgage insurance, which is required when you finance more than 80 percent of any purchase price with the main mortgage. That alone can add an additional 1 percent of the mortgage amount per year. The interest paid on both mortgages can also add up to a nice tax deduction.
On the downside, you'll have two mortgages with a piggyback loan. On top of that, your equity will grow at a fairly slow rate since most of your payments go to interest charges. The second mortgage is also likely to carry a higher interest rate than the base mortgage. If the real estate market drops, you'll have to pay off both mortgages to sell the property. This means you'll have to come up with cash for any shortfall if you're in a negative equity situation.
It may be tougher to qualify for a piggyback mortgage than a single mortgage. The higher interest rate on the second mortgage could mean the cost of PMI is less than the additional interest charges you pay each month. Crunch the numbers to see which option gives you the best combination of a low monthly payment and a large tax deduction. However, if you don't have the cash for a down payment, you may have no other option.
While there are many permutations of the 80/20 mix, the 80-10-10 was among the most common as of 2012. Instead of taking a second mortgage, you make a 10 percent down payment and finance only the remaining 10 percent to keep your main mortgage at the magic number of 80 percent. This gives you an instant 10 percent equity stake. That could lead to a lower mortgage rate for the other two pieces of the financing puzzle. It also lowers your monthly payments, which reduces the chance of your mortgages going underwater.
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